*** Nasdaq stocks fall sharply in after-hours trading -
nearly $3 trillion in paper wealth has disappeared since
March...
*** The U.S. dollar may be in trouble...blabbermouths...
rich nations...consumers beginning to worry...and more!
*** "It's a very delicate market," said an analyst
yesterday, "one that moves quickly and mercilessly if
there's anything perceived as being negative."
*** But what could be 'negative?' Yes, the economy is
slowing...the revised figure for the last quarter showed a
2.4% growth rate - the lowest in 4 years. And after-tax
profits growth rate dropped to 0.6% - the worst performance
since the '98 Asian currency crisis.
*** And, yes, an old friend reports that the IPO he
scheduled for a start-up tech company had to be rescheduled
for January. And the WSJ adds that IPO investors are losing
interest in the new tech start-ups. "Everyone's bearish" on
technology said another source - quoted by Reuters.
*** And, yes, collapsing Nasdaq prices have already wiped
out nearly $3 trillion in stock market wealth - an amount
equal to almost the entire increase in wealth gained by all
the households in America in 1998. And still the average
stock is overvalued by 2, 3, maybe 4 times.
*** And it's also true that the latest Presidential
election was perhaps the most bollixed in American history.
*** And, yes, energy prices are twice what they were a year
or so ago...and heating oil stocks are worryingly low. And
the International Herald Tribune reports today that
"Economic Signs Point to a Global Slowdown."
*** But apart from that - what's the problem?
*** The Nasdaq fell modestly yesterday, losing 28 points,
and dropping to its lowest level since Oct. '99. It has
been down in 12 out of the last 15 session.
*** The Dow rallied, up 121 points. But there was no
breadth behind the numbers... 1465 stocks advanced on the
NYSE; 1396 declined. 101 issues hit new highs; 143 hit new
lows.
*** The real action happened in after-hours trading. Altera
and Gateway each fell about 25% after warnings of lower
earnings in the 4th quarter. Intel lost 10% to close well
below $40. Dell dropped below $20 to a fresh 2 � year low.
*** "Market wipeouts now take months instead of years,"
says Ray Devoe. "The number of stocks down at least 95%
from their 52-week highs is staggering. Some have fallen at
least that much in 2-3 months. The latest casualty is
Mortgage.com (MDCM - $0.03) that has fallen from $22 a
share in August 1999 to 3 cents today - a loss of 99.9% in
14 months." (see: "Pilot Error" and the Short Lived Insect
http://www.dailyreckoning.com/body_headline.cfm?id=790)
*** When will the 'dot.com dollar' follow the dot.com
stocks? Maybe we will not have to wait long. There is a
"perception that the U.S. economy may be headed for
trouble," said a gnome in Zurich, quoted in the Financial
Times, "the dollar is over-valued and people are realizing
that and reducing their long dollar positions."
*** The dollar fell again yesterday - to 86 cents/euro. Oil
rose 41 cents. And gold fell $3.40.
*** "It's only been 10 months since Janus closed some of
its funds to new investors," writes Eric Fry, "and already
the firm cloisters itself in a shroud of secrecy. Still,
sagging investment returns are hard to conceal. The
flagship Janus 20 fund, after gaining a blistering 65% last
year, is down more than 20%... and a whopping 30% from its
March 24 high. Likewise, many of its other funds are
suffering losses on the year." (see: Janus: Expose Thyself!
http://www.dailyreckoning.com/body_headline.cfm?id=786)
*** "This morning on Good Morning America," reports a
colleague from Baltimore, "a stock analyst showed Diane
Sawyer two stocks, Cisco and Philip Morris and asked her
which see would have thought fared better since Jan 1:
Cisco, down 3% and Phillip Morris up 63%." Near the
beginning of the year, Daily Reckoning readers were
advised, if I recall correctly, to sell Cisco and buy
Phillip Morris. So far, so good.
*** "You are a blabbermouth," (or words to that effect)
scolds my old friend Harry Schultz, Chevalier, KOM, and
BSD. "Only a friend would tell you," he writes, suggesting
that I cut back the Daily Reckoning dramatically. He's
probably right. But there's so much going on...
*** A survey by the Consumers Federation found that people
are getting worried about debt. 24% of those polled said
they intended to cut back on holiday spending.
*** And here's a man-bites-dog story: Crosspoint, a $1
billion Venture Capital tech fund in the S.F. Bay Area
decided to rap up the fund and return the money. "Unless we
can look them [investors] in the eye," said the remarkably
honest John Mumford, "and say we believe we have a great
model to make all of this money, in good conscience, we
can't go forward." Conscience, good or bad, didn't prevent
venture capital firms from raising $70 billion in the first
3 quarters of 2000, compared to only $11 billion in '99.
*** And, according to one correspondent - a usually
unreliable source - for all the blessings of its dynamic
economy and New Era technology - the U.S. still is not
among the top 7 countries in terms of per capita income.
The Top countries are Japan (even after 10 years of
recession and bear markets), and a collection of rigid
European Social Democracies, including Denmark, Sweden,
Germany, Luxembourg, Norway and Austria.
Starting in 1994, $1,000 invested in every one of these
modest recommendations - far away from the "must own"
stocks of Wall Street - could have returned you $794,815.
After the first few winners, you could have been investing
with 'just profits' from previous winners...
and if you had upped your investment to $5,000 each from
the winners pool, you would have made millions of dollars.
Click here for...
"It's a good thing they brought Michael Murphy along,"
wrote Dan Denning from San Francisco yesterday. Dan was
attending a financial conference, and articulating the
point we have (unintentially) demonstrated time and time
again: you can't predict the future.
Murphy thinks "he CAN predict the future," Dan reports,
"And he says we're in the middle of what he calls a
'Transcession'." Evidently, the economists' glossary was
insufficient for Mr. Murphy, who needed a new word - a mot
juste - to describe this new phenomenon.
What is it, you may wonder? Dan explains: "It's the period
when a revolution displaces the incumbent economy. For
example, the Industrial Revolution began in roughly 1845,
but didn't seriously disrupt the Agrarian economy until
1870's when the new technologies went from being disruptive
to commonplace. Mass production hit full stride in
1918...[Remember, this is all according to Michael Murphy,
who - I will warn you - thinks he sees another 'Revolution'
in the making] but it wasn't until the 1930's that the
division of labor was fundamentally altered by the
machine."
"And as you might guess," continues Dan's report, "IBM
introduced the PC in 1981. And this, according to Murphy,
will start destroying the Old Economy in earnest by 2003."
Racing ahead, and to fully disclose our bias, I will also
warn you that 4 of Murphy's 'must own' stocks for the new
revolutionary economy are the very same ones which Dan and
Lynn Carpenter have identified as 'must sell' stocks for
the readers of their Fleet Street Letter: AOL, Cisco, Intel
and Oracle.
Transcession must be the fall-back position for the New
Tech bulls. The Nasdaq is down 46% from its March high -
and some of the 'must own' tech stocks are down even more.
Computer sales, chip sales, telecoms, Internet sales,
profits, growth rates, GDP growth - just about everything
associated with the big techs seems to be disappointing.
"People are realizing," said a 'global strategist' for
Merrill Lynch on the front page of the International Herald
Tribune today, "that tech stocks are cyclical."
But now the dreamers and schemers among the New Era
believers have figured out an explanation: there is a time
lag between the introduction of 'disruptive technology' and
its radical consequences.
In fact, a Daily Reckoning reader wrote yesterday to pose
the question: "Isn't it possible," he asked...making it
hard to deny... "that information alone may not make
people rich...but when it is applied by businesses to make
better, faster, cheaper products it will then pay off in an
astonishing way?"
Yes, it is possible. More access to information at lower
cost should allow more people to do more different things,
more efficiently. Everyone will benefit. Production will be
improved. Prices will fall. We will all be richer.
But save the astonishment. You may need it when you see how
low the information mongers - AOL, Cisco, Intel, IBM, AMZN
- go.
I return, today, as I threatened to do, to the subject of
American capitalism...and why you cannot now buy shares in
many of the leading public companies and expect to profit.
More than that, I want to show you how the promise of the
Information Revolution is making businesses and investors
in America poorer, not richer.
You may recall how America's credit bubble made consumers
poorer. Not wanting to miss out on the fast, easy wealth in
the stock market, Americans became momentum investors at a
time when momentum had reached record levels. Watching
their portfolio statements go up month after month, people
felt richer. And offered new credit every time they went to
their mailboxes...they found that they could improve their
standards of living, beyond the increases in their
earnings, while still getting richer.
So, they borrowed and spent...and bought more stock. They
borrowed at 8% or more to buy TVs, vacations, and "I'm with
stupid" tee-shirts that yielded no financial return. And
the stocks they bought, similarly, yielded no more than a
Paris taxi driver in a traffic circle.
For a long time, though, Mr. Market told them they were
getting richer. But Mr. Market has a way of changing his
mind. Already nearly $3 trillion of 'wealth effect' has
disappeared. And the debts remain. At some point, depending
on when and how much stock they bought - investors become
net losers. Having spent more than they could afford to
spend, they are actually poorer then when they began.
This is true of the entire economy. During the last five
years, spending increased faster than income. Putting aside
the unrealized gains on stocks (which are fast
disappearing) the whole society is poorer...it has been
hollowed out by the mass delusion of the Information
Revolution.
But what is true of consumer households is also true of
business. They borrowed at high yields, and bought assets
with low ones...sometimes they bought other businesses, as
Cisco did, or their own stock, as IBM did. "From a strict
economic perspective," comments Dr. Kurt Richebacher,
Austrian-school economist and old-school moralist, "it is
hard to imagine a greater economic folly..."
Why would corporations do such a thing?
"In a world where managers' incomes are effectively linked
to what is currently happening to stock prices," answers
Dr. Richebacher, "there is a very strong incentive to put
the instant maximization of shareholder value over any
other consideration, regardless of foreseeable, adverse
micro- and macro- economic consequences in the longer run.
It's the policy of the desperado who has everything to gain
in the short run and nothing to lose in the long run."
As reported here previously, IBM increased it revenues only
5% over the last 4 years...and profits only 1.3%.
"However," Dr. Richebacher continues, "thanks to a massive
$34 billion share buyback program, it managed an average
annual rise of 10.5% in the one number that Wall Street
treasures above all others: per share earnings. Meanwhile
the debt ratio when skyward."
The way to build wealth is no secret. You must save money
and invest it in things that will produce more. A farmer
saves his 'seed corn' and then plants it. The more he saves
and the more he plants - the more corn he will have.
Businesses need to take savings (either their own
accumulated profits or the savings of others) and build new
plants and equipment that will turn out more goods and
services more efficiently.
Of course, most businessmen went about their work in the
ordinary way during the '90s boom. But many were infected
by a group-think virus that was in tune with the illusion
of the Information Age and investors' desires to get rich
quick from it. They called it the "shareholder value
model".
"The conspicuous peculiarity of the shareholder value model
is its enthrallment with corporate restructuring," explains
Dr. Richebacher. "Basically, restructuring is a vague
euphemism for all kinds of measures that tend to enhance
shareholder value in the short run, virtually to the
exclusion of any other goal."
Richebacher refers to this as "late, degenerate capitalism"
and characterizes it as "a frantic chase of corporate
management after quick and easy profits in the stock market
through deal making and stock buybacks...the responsibility
of the corporate manager under this 'new' capitalism begins
and ends with the near-term stock price."
"It's late, degenerate capitalism in the sense that saving
and capital accumulation have fallen into complete
oblivion," Richebacher observes. "Worse still, it is a
capitalism which any educated nation should be ashamed
of... What really happens is rampant over-consumption at
the expense of future generations who are to inherit
depleted domestic capital formation, a mountain of foreign
indebtedness and lots of worthless paper assets (stocks and
bonds)..."
Richebacher describes how these companies make the whole
economy worse off: "Rising stock prices add nothing to an
economy's capital stock. What they create is the exact
opposite: soaring claims on the part of the stockowners on
the national product and its capital stock. ...The booming
stock market of the late 1990s has furnished stockowners
with virtually limitless actual and potential purchasing
power, and as a rule, this happens to stimulate borrowing
and spending... As fewer resources remain available for new
investment, such a switch in the use of resources ranks in
economics as "capital consumption".
It is as if, to use a familiar expression, the farmers ate
their seed corn.
Your long-winded correspondent,
Bill Bonner
P.S. As the price of information falls...companies will put
it to work. They will use it to inform their
decisions...about what new factories to build and how to
design them better. The auto companies will learn to
produce and market better cars at lower prices, for
example. This will not be the result of an Information
Revolution, however, but of a haphazard evolutionary
process of learning...by trial and error, luck, hard work
and inspiration. The companies that will prosper will be
those who figure out how to use the information available
to them. Who knows, among them could even be one of Michael
Murphy's 'must own' stocks. No one can predict the future.
About
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Last modified: April 01, 2001
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